PRA Publishes CP13/18 on Equity Release Mortgages Under Solvency II

CP13/18 proposes to update SS3/17, with the aim to provide greater clarity to firms on the expectations for how they should ensure that the matching adjustment claimed on restructured ERMs is not overstated. The proposals aim to ensure that, where firms have invested in ERMs and have approval to use the matching adjustment or transitional measure on technical provisions, their technical provisions are not understated and that their Solvency II and ICAS balance sheets include appropriate allowance for the risks to which they are (directly or indirectly) exposed. CP13/18 is relevant to insurance and reinsurance companies holding ERMs. The proposals included in CP13/18 are as follows:

• Firms using the approach and minimum calibration proposed would meet the PRA expectations for assessing the allowance for no negative equity guarantee (NNEG) risk for the  Effective Value Test (EVT).
• Firms holding ERMs should include an explicit allowance for other risks within the EVT.
• Where firms holding restructured ERMs in their matching adjustment portfolio cannot meet the EVT, this suggests that they may be taking an inappropriately large matching adjustment benefit. Thus, they will need to review their current approach and consider making changes to the structure, valuation, or rating of restructured ERMs to ensure that they are able to calculate their matching adjustment benefit consistently with Solvency II requirements
• Firms holding ERMs that benefit from the transitional measure on technical provisions should adopt the same approach to an assessment of NNEG and other risks for their ICAS technical provision calculations as they do for Solvency II technical provision calculations for the purpose of calculating transitional measure on technical provisions to ensure consistency between the calculation bases
• Firms should consider whether they need to revise their internal models in response to any of the above changes

Related Links

• Press Release
• CP13/18 (PDF)
• Letter from David Rule

Comment Due Date: September 30, 2018

Effective Date: December 31, 2018

Keywords: Europe, UK, Insurance, Solvency II, Equity Release Mortgage, CP13/18, SS3/17, Matching Adjustment, PRA